Pricing Management

RedRoute is a global leader in pricing management best practice. Our Pricing Management Service will enable you to define the best pricing strategy, tactics and practical implementation for your business, one that develops guidelines that maximise profits in both the short and long term and ensures you of on-going marketplace success.

At the heart of this service is a fundamental understanding of the relationship between volume and price - which in simple terms enables you to understand the trade-off between price sensitivity (also known as price elasticity) and profit. An example is shown in Figure 1. The vertical axis shows price elasticity - that measures the percentage change in sales caused by a 1% change in (relative) price. On the horizontal axis is the gross margin on your sales. The higher your gross margin and the higher your price elasticity, the more likely it is that your best strategy will be to reduce price to gain additional sales and volume. When margin and elasticity are both low, the best strategy will usually be to increase price.

But in the real world this simple chart becomes much more complicated. There are very many practical considerations and market dynamics, including several fundamental pricing concepts that need to be understood and quantified in order to define what Figure 1 really looks like for your brand and how it changes as you change your price and hence change your gross margin position.

Understanding this complexity, from top to toe, is what we do.

Without this understanding pricing decisions are fraught with hidden dangers.

One of the most notable examples, which became a business school case study known as 'Marlboro Friday', occurred in when the Marlboro cigarette brand made a relatively small increase in price that had unexpectedly dramatic consequences. Although the price increase was small it stretched the differential versus alternative brands beyond a key break point and caused many previously contented consumers to re-appraise their brand choices. Many of them found the "value equation" was now unacceptable and deserted the brand en mass in favour of cheaper alternatives. With hindsight the reasons this happened we're glaringly obvious and better up-front analysis would have avoided these undesirable consequences that subsequently took them two years and over £xm

Pricing is the only marketing decision that has a direct impact on every sale you make. It is worth investing some time and effort in getting it right.

The Insights that Power Our Service

We have been working on optimising pricing decisions in various roles since the 1970's. Few other agencies can match our experience and track record of success. The keys to this success are in understanding - and being able to analyse correctly - the five key dimensions that influence the relationship between price and volume.

These five key dimensions can be summarised as follows:

Price Positioning. Your relative price position within the market is a signal to buyers of the quality of your offer. There are many aspects to understanding buyer/user perceptions that vary by brand and market so getting this correct is crucial

Price Sensitivity (or 'elasticity'). This applies at many different levels (e.g. market, channel, brand, product, pack-size, and so on) and the more you understand how it works in your market the more effective your pricing decisions will be

The Value Equation. If the actual performance of your product or service is out-of-line with the price positioning you adopt - or if marketplace changes affect that balance - buyers will re-appraise their choices and you need to anticipate this, not just to react to it after it has happened. Understanding, monitoring and actively managing the balance between Effective Net Preference (ENP) and relative price will ensure your brands continued marketplace success

The Natural Level of Demand. All markets have a distribution of volume demand versus price determined by the characteristics of the product field, technology, real GNP in the country, product taxation (duty; VAT), market structure, market concentration and various other factors. Understanding this structure not only enables you to estimate the likely demand for new product entrants but also 'change the rules of the game' in your favour. It is probably one of the most under-used price levers.

The Financial Structure (or 'Value Chain') in the category - not just for your own products / services but also of your suppliers and distributors. Re-engineering the value chain is an effective way to gain price increases that all parties can subscribe to. It is also crucial for understanding (and simulating through 'what if...?' scenarios) the likely financial impacts of any price moves you (or others within the chain) might make. So you can see before the event what will be likely to happen and not be forced just to live with it after it has already happened.

Needless to say we consider any or all of these dimensions as are relevant for answering your particular pricing question. This ensures that you have the optimal pricing strategy and all appropriate guidelines on how to implement it. This includes, for example, how to convince others to support your strategies and tactics, and how to use price promotions to drive profitable sales performance whilst resisting distributor demands for unnecessary and/or ever-deeper price deals.

To make these analyses and recommendations we use your own historical sales and market research data, extended where necessary with new research into customer portfolios, purchase motivations, and market pricing.Workshops are used to ensure the resulting recommendations and evidence base is fully understood within the organisation and effective implementation solutions devised.

Where appropriate we will also design and help you implement real in-market price trials to enable you to compare test and control groups to see the differences that alternative pricing strategies and tactics will have.

All of these tools, techniques, and insights mean that you will arrive at a pricing strategy which is robust, profitable and ensures long term business success.

Benefits

The scale of potential benefits from correct Pricing Management are profound - and the risks from not getting it right can ultimately result in business failure.

We have successfully advised some of the world's leading companies on optimal pricing strategies leading them to gain significant profit growth. One example was the UK's biggest wine supplier, with over 20% share of the UK wine market.

Unlike many consumer goods markets, the wine market is very fragmented with wine varieties often having more consumer loyalty than individual wine brands. Pricing in this market is therefore highly complex to get right and promotional pricing is a key part of any pricing strategy.

Our analyses showed how more effective pricing policies across the portfolio could increase profits by c.£18m a year, of which about c.£12m was likely to be fully realisable. Moreover, we helped them understand the profit implications throughout the value chain and demonstrate the profit benefits for retailers as well as suppliers.

This comment from the Financial Director illustrates their satisfaction with our support in tackling the issue:

"RedRoute's help in quantifying the likely impact of alternative pricing and price promotional strategies and tactics in what were new and very challenging market conditions was extremely valuable. This has helped us manage our marketing budgets more effectively at what was a very demanding time in the drinks industry."

Process

Depending upon your particular pricing problem and your particular situation and needs, not all of these three phases may be needed to provide the right solution.

Therefore, at the start of any assignment we will undertake a Feasibility & Scoping study to understand your requirements, available data and recommend a solution. This ensures that you have the most cost-effective solution and the length of the project is as short as possible.

The typical contents of the three phases are described below.

Analysis Phase

Here we uncover the true pricing relationships for your brand(s), product(s) or service(s) taking into account all the necessary detail and complexities that apply. This phase is strongly factually data driven and on occasion may require undertaking additional market research amongst your buyers/users to understand their purchase motivations and decision criteria. All dimensions of the pricing relationships in your market that are relevant for addressing your pricing question are evaluated in depth and recommendations for optimal pricing strategies and tactics developed.

Workshop Phase

Relating the analytical results to your company's own experiences and understanding is essential if the results are to be used effectively and the maximum benefits derived. The Workshop Phase ensures this understanding is achieved. It enables everyone involved in the implementation of the strategy to see how the rules will be used and how they can leverage them to achieve the company's objectives.

Implementation Phase

This phase typically takes one of two forms. The first is a direct implementation of the results. We work with you to create any necessary exhibits, case studies or other collateral needed to support the strategy and provide back-up on queries & discussions as required. We also help you solve any unexpected hurdles, extending the analyses and/or flexing the recommendations to handle differing situations and maximise the benefits obtained.

The second firm is where one or more statistically designed in-market pricing tests are run to validate, tailor and finesses the findings and conclusions prior to full implementation. These are designed so that the results obtained are unambiguous, typically using Test v Control comparisons. This enables you to test out differing implementation options to see which works best without putting all of your existing sales and revenue at risk. Once the tests are competed the project proceeds to the standard implementation process outlined above.